CR Flashcards
(140 cards)
1
Q
Areas to investigate in doing tax due diligence:
A
CT details, HMRC correspondence, VAT group, NGNL transfers to connected parties, payroll, tax loss details, change in trade.
2
Q
Things to remember in auditing inventory for fraud:
A
Roles and responsibilities, controls, all physical locations, obsolete items, dispatch systems, goods received,
3
Q
Things to consider if deciding to accept audit/ assurance.
A
Are we objectively able to do it, are we competent (to avoid being sued for negligence), liability of firm (to who?), nature of assurance being given (absolute assurance?). Definitions used in unusual engagements.
4
Q
If an AFS item is revalued upwards, where does the amount go?
A
Credit to AFS reserve.
5
Q
A HTM item is impaired due to the issuer of the bonds going into administration. Where does the debit go?
A
To the PnL
6
Q
If you sell something in a HTM category early, what happens?
A
The category would be “tainted” - you now can’t use it for this year and two more years.
7
Q
Which category of financial asset is a bit of a dumping ground?
A
AFS - people often put it there to avoid tainting HTM
8
Q
Where does FVTPL gain get taken to?
A
Finance income in PnL. Difference between b/f and c/f. Also the general interest received. All to finance income.
9
Q
How do you hold the value of HTM assets?
A
At amortised cost, add interest, less interest received gives c/f. Doesn’t look like you revalue each year (e.g. if share market price changes)
10
Q
How are AFS items re-valued?
A
Re-measured at each reporting date and gains/ losses taken straight to OCI. (Extra column in the amortisation table).
11
Q
What are the three parts of the definition of a derivative?
A
Value derived from an underlying item, requires no or small initial investment, settled at a future date.
12
Q
When must something be accounted for as an “embedded derivative”, a separate financial instrument?
A
The combined contract can’t be a FVTPL item, a separate contract with the same terms would be classed as a derivative, the characteristics and the risks of the embedded derivative are not closely related to the host contract.
13
Q
If an entity acts as an agent (I.e. An internet travel agent) and passes on some of his takings, what counts as revenue?
A
Only the commission received counts as revenue.
14
Q
How is revenue recognised for reward schemes?
A
Include the value of reward points in total revenue. Then divide cash received into revenue and deferred revenue proportionally.
15
Q
If you know the outcome of a contract (revenue). And you know costs to date, expected costs, % completed. How do you work out cost figure for year?
A
Stage of completion percentage times total expected costs (i.e. Don’t just take costs to date).
16
Q
If you don’t know the outcome of a contract but all costs incurred will be recoverable. What is revenue and COS this year?
A
Both will be the incurred costs to date, so profit is nill.
17
Q
If a loss will be made on a construction contract. How do you recognise revenue and costs at a given point?
A
Revenue is the percentage of revenue relating to the stage of completion. Loss is the total loss. Costs is the balancing figure.
18
Q
How do you work out the amount to put on the SFP for a construction contract?
A
Costs incurred + recognised profits - recognised losses - progress billings
19
Q
How do. You work out the PnL charge for a defined benefit plan and the OCI net remeasurement gain or loss?
A
PnL charge is current service cost plus interest finance code (on obligation) less interest return (on plan assets). The net of gain / loss on each goes to OCI.
20
Q
If given the defined benefit obligation at year beginning and year end and discount rate used, how do you work out the interest cost?
A
Discount rate used x obligation value at (beginning of year)
21
Q
If share options are granted to directors, then the share price falls, and the fair value of option goes from 5 to 18 when the exercise price is reduced, how is the expense altered?
A
Look at the difference in fair value (13) for all share options granted and spread this over the remaining vesting period.
22
Q
If a company sells a 1 million trade receivable with recourse for 8 million, what is the double entry?
A
Dr Cash, Cr Liability 8 mill. With recourse means they still have risks so treat as loan secured on receivables balance.
23
Q
What are the details for reclassification for an AFS investment to loans and receivables?
A
New carrying value measured at fair value on reclassification. Amounts already in AFS reserve to be amortised to PnL over remaining useful life of investment.
24
Q
What does IFRS 7 require qualitative and quantitave disclosure in?
A
Market (changes in market value of asset), credit (one party defaults) and liquidity risk (difficulty in meeting obligations).
25
How are financial assets measured in IFRS 9?
Either fair value or amortised cost - base don the entity's business model for managing the assets and the contractual cashflow characteristics of the asset.
26
When you finance lease something to someone, it's like you're making a sale, how do you record the sale?
Revenue is lower of FV or PVMLP. COS is the cost to you. Remember the finance gain on this revenue figure will also affect PnL for the year.
27
How do you decide if a segment is reportable?
At least one of these above 10%: total sales, total RESULTs (absolute of all those in profit or all those in loss), total assets. Then see of external sales for all segments chosen are > 75% of total reportable external sales.
28
For an interim report, which parts must show cumulative figures? And which need the interim figures?
SCI needs interim and cumulative. SCF and SOCE need only cumulative. SFP comparatives are end of prior year.
29
If a CGU is impaired, how do you put the impairment into the assets value?
Split proportionally to NCA of CGU as these aren't currently held at recoverable amount. (CA are I think). Also impair goodwill for the impaired subsidiary for relevant percentage. Impairment expense is then all of it as a total.
30
Which of these is not a control activity: Sequence checking, segregation of duties, Information procession, Authorisation.
Sequence checking, it is a type of application control, not control activity.
31
As per ISA ?, what are the elements of internal control?
ISA 315: Control environment, Entity's risk assessment process, Information systems, control activities, monitoring of controls.
32
ISA ?, says that group should communicate what requirements to the component audit team?
ISA 600, Work to be performed, form and content of communications, confirmation of cooperation, relevant ethical requirements, materiality, relevant significant risks of misstatement, list of related parties.
33
How do you work out diluted earnings per share?
This is supposed to include contingent events if the will dilute the EPS.
In one question we had to work out the normal EPS. Then the incremental by calculating the interest and then tax effect on profit over the related total number of possible extra shares. Then combining into one total fraction of all bits.
34
How do you calculate the return on capital employed as a percentage?
PBIT / Total equity + Net Debt less Investments... It looks like net debt is your borrowings less cash.
35
How do you calculate Gearing (specifically which parts of Equity get included?).
Net debt includes subtracting the cash in hand. All of equity is included (retained earnings and all) SMCH23ST1
36
List some possible regulations a company would have to follow
Health and safety, accounting, taxation, legal
37
What are the three types of financial risk?
Economic, translation, transaction, also gearing risk
38
How do you work out EPS if there's been a rights issue?
Multiple the pre-rights issue number of shares by the adjustment fraction: post issue value/ TERP
39
How do you account for a dismantling cost of an asset?
Dr Asset Cr Liabilty with present value of dismantling cost. Then depreciate asset on new total value and amortise out the liability.
40
If annual cash interest payments are paid in advance how do you measure the interest in the PnL?
Do the percentage on the b/f value less cash paid out.
41
When should you recognise a provision?
When there is a present obligation for a past event.
42
How much of the gain or loss on a cash flow hedge should be recognised in PnL?
The ineffective portion, . Lower of cumulative gain or loss on hedging instrument and cumulative change in fair value of hedged item goes to OCI. Remaining change in FV of hedged item goes to PnL
43
Do employee share purchase plans count as share based payments under IFRS 2?
No, it doesn't apply to transactions with employees in their capacity as shareholders.
44
How do you deal with the NCI where the acquisition included some normal shares and some preference?
Work out fair value of net assets. NCI is: NCI percentage of FV of (net assets less all preference shares) PLUS NCI preference percentage of preference share total
45
What does IAS 12.7 say the tax base is of interest receivables and trade receivables?
Interest receivables is nill, trade receivables tax base is carrying amount
46
How should the discount rate be calculated for derived benefit obligations?
With reference to high quality corporate bonds of similar currency and maturity. If no market exists refer to government debt. If none of these exist extrapolate yield curves.
47
According to IAS 19 what should the discount rates not reflect for derived benefit obligations?
Investment risk, actuarial risk, specific risk not relating to entry's business.
48
Are provisions allowable for taxation?
Specific ones yes, not general.
49
How do you value assets held for sale?
Lower of carrying amount and fair value less costs to sale for the whole asset group.
50
If an asset moves from AFS to normal asset how would you value it?
Look at the higher of Value in use and fair value less costs to sale. The current value will then be the lower of this answer and the carrying amount had it been continually depreciated.
51
Should transaction costs incurred in renegotiating a loan be charged to PnL when payable? IAS ...?
Yes to PnL if the revision is treated as the extinguishment of the loan, but if it is a modification then it can be amortised over the remaining life. IAS 39
52
When should revised terms of a loan imply that a loan is derecognised and a new financial liability recognised?
If the present value of the cash flows under the new terms is 10% or more different from the present value of the original then it should be recognised as a new loan. Discounted at the effective interest rate and transaction costs included.
53
Where does the remeasurement component on account of the actuarial valuations get charge to for a defined benefit pension scheme?
Taken to OCI. The service cost and net interest charges go to the PnL.
54
What are two advantages of defined contribution pension schemes over defined benefit schemes?
Defined contribution schemes are easier to account for. (Dr staff costs, Cr cash). They are also easier too administer and manage. Risk resulting from variable returns is borne by the employee, not by the employer.
55
How can you work out your deferred tax asset?
Usable tax asset on likely future profits. Do tax rate on carry forward-able tax losses.
56
If deferred cash is contingent consideration on purchasing a subsidiary, how should it be included in good will?
Discount it by the discount factor and multiply it by the likelihood of it been given.
57
Is there a minimum frequency of actuarial valuations required for retirement benefit valuations?
No
58
If you enter a fixed price forward contract to buy titanium in 12 months for later use in WIP is that a derivative? IAS?
IAS 39.5 excludes contracts entered into for purchase of non financial items in accordance with entities expected sale, purchase, usage requirements. IAS 39.6(C) includes though contracts entered into for receipt of non financial items where it is sold shortly thereafter to exploit short term price changes.
59
Do you use the year end values or the fair value at grant date for cash share appreciation rights as employee benefits?
For share options you'd use the grant fair value but if it's a cash payment use the year end amount. Everything in that fraction calculation could change.
60
What is a joint arrangement?
Where two or more parties have joint control
61
What is a joint venture?
A joint arrangement where the parties have rights to the net assets and then can be accounted for using the equity method.
62
What is a joint operation?
A jointly controlled asset not structured through a separate vehicle. Recognize in statements line by line I think. Assets, liabilities, revenue, share of revenue from sale of output, expenses.
63
How would you measure goodwill when associate becomes subsidiary? Fair values used.
Consideration transferred for extra interest plus NCI value plus (fair) value of retained interest less fair value of net assets of subsidiary.
64
What are some good titles to use in a report analysing financial performance and financial position?
[Growth, Profitability, Efficiency, EPS, Contingent Liabilities] and [Liquidity, Working capital management, Solvency]
65
How could you measure the efficiency of a business from the financial statements?
Asset turnover (Revenue / total assets) or return on capital employed. (PBIT / (Debt + Equity - Investments))
66
What is bad about companys using overdraft?
It could be withdrawn at any time, it is also expensive.
67
What is a disadvantage of high inventory days?
Cash is tied up, and obsolescence when new products are brought in.
68
What is a disadvantage of reduced payables days?
You are not taking full advantage of your credit period which may adversely affect cash flow.
69
What is the current ratio?
Current assets / current liabilities
70
What is the quick ratio?
(Current assets - inventories) / Current liabilities
71
How do you work out diluted EPS if there are granted options to subscribe to shares at below market value?
Normal EPS but add the number of "free shares" you're handing out to the total number of shares. Work out the cash you'd get from giving out your shares, then the amount of shares at market value you would actually get for this cash. The amount of shares you are issuing over this normal amount is the "free" amount.
72
What are the main principles covered by the UK corporate governance code?
Leadership, effectiveness, accountability.
73
What should you ensure if auditing an entity and an asset has been revalued?
Under IAS 16 you should ensure the entire class has been revalued. Then check the disclosures made are adequate.(details on date, valuer, sig assumptions, carrying amount otherwise).
74
When should a financial instrument not be measured at fair value of consideration net of issue costs?
When it is FVTPL
75
How often should goodwill in a business combination be considered for impairment as per IAS ?
IAS 36 requires and annual test for goodwill
76
What are the conditions for an asset to be AFS?
Management committed to the plan, active programme to locate buyer, actively marketed for reasonable sale price, expected sale within one year, unlikely for significant plan changes.
77
How is an AFS valued?
Lower of carrying amount and fair value less costs to sell. No longer depreciated after reclassification.
78
What is tangible net worth as a calculation?
Net assets plus deferred tax I think?
79
Which IFRS is consolidated financial statements?
IFRS 10
80
Which IFRS is Business combinations and what does it deal with?
IFRS 3 - How investments should be treated , costs relating to acquisitions. Issuing of debt or equity.
81
Which IAS deals with investment properties?
IAS 40
82
PPE is carried at fair value. If assets are depreciated and revalued, One asset is then changed to be let out as an investment property, how does it recognition change?
No longer depreciated and just measured according to fair valuations. As per IAS 40. At this point uplifts to new fair values are taken to PnL.
83
What are the 4 requirements to recognise an intangible?
Identifiable (can be disposed of or acquired separately), controlled by the entity due to past events, generate future economic benefits, have a reliably measurable cost.
84
What are the conditions for a provision?
Present obligation from past events, It is probable that there will be an economic outflow, the value can be measured reliably
85
How do you impair a disposal group?
First impair the goodwilll then impair the remainder proportionally.
86
If a subsidiary is being closed rather than sold, would it be included as a discontinued operation?
Apparently not
87
When should you preform impairment reviews?
Annually for purchased goodwill and items not being amortised. For other assets perform when some indication of impairment has occurred.
88
How do you do good financial statement analysis?
The examiner said you should try to answer questions a user of the accounts may pose, who, what, why, how, when, where. Can you spot the big picture? So what next?
89
How do you work out ROSF? Return on shareholder's funds?
Net profit for period / (Share capital and reserves)
90
How do you work out return on capital employed?
(PBIT + associates post tax earnings) / Capital employed.
91
How do you work out net asset turnover?
Revenue / Capital employed OR Revenue / NCA
92
How do you work out Dividend cover?
EPS / Dividnd per share
93
What are some key estimates that are often made in financial statements?
Depreciation, revaluation, impairment, inventory valuation, operating / finance lease, provisions, trade receivable collectability.
94
What are some specific examples of temporary tax differences?
Depreciation and capital allowances, provisions, development costs.
95
What is the IAS of inventory?
2
96
What things should you think about if you have been engaged into an audit late after the previous auditors unexpectedly left?
Ensure no ethical or professional issues. Professional clearance has been obtained from previous auditors. MLO procedures and client identification. Appointed after year end so stage of completion of things at year end hard to do (e.g. WIP) - may have to do "except for" opinion. Disclaimer if potential effect pervasive.
97
Which IAS is about revenue?
18
98
If there is contingent consideration in the sale of a subsidiary, should you include it in profit calculations?
Yes, include contingent consideration even if not probable.
99
The conditions for capitalisation of development are.... under IAS ....
IAS 38. Technical feasibility of completing asset. Intention to complete it. Ability to use or sell it. Ability to produce economic benefit. Availability of other needed resources to use it. Ability to measure expenditure reliably.
100
Which IAS deals with impairment of assets?
IAS 36 - No asset should be carried at more than their recoverable amount.
101
Which IAS deals with accounting policies and estimates?
8
102
What deferred tax do you recognise on account of goodwill on a business combination?
IAS 12.15(a) specifically prohibits the recognition of a deferred tax liability on initial recognition of goodwill.
103
Can you do non -audit work for a client and audit work? What might it depend on?
Firstly it is never appropriate to undertake a management role, if the company is not listed or public interest then non-audit work may be ok but you'd have to consider materiality and its merits, we might need to consider integrity and objectivity and safeguards available. WOuld a third party consider our service without impairment to integrity and objectivity.
104
Can your firm help with a client's IT system?
Ethical Standard 5.63 says no if we would place significant reliance on it.
105
Should receivable sbe held at amortised cost? IAS ?
IAS 39 says loans and receivables should be, but if short term receivables with no stated interest rates then no need. Discounting may not be material. IAS 39 also says we should annually assess if impaired.
106
How do you measure non current asset turnover? What is it for?
Revenue / NCA. It is essentially a measure of how efficiently your NCAs are working to produce revenue.
107
How do you convert a foreign sub?
Translate all the bits (at the various rates), the post acqu change in reserves is the balancing figure.
108
When there is a fair value uplift of PPE in a foreign sub, where does the profit go?
Pre-acquisition reserves.
109
How do you work out the exchange differences from translating the sub? Where is it recorded in the statements?
```
Opening assets at CR
Less opening assets at OR.
Plus
Profit for year at CR
Less Profit for year at AR
```
Record it in "other comprehensive income" and hold in equity. Annual g/l allocated between P's share and NCI share in OCI. (State with "Exchange differences which includes goodwill gain")
110
What happens to goodwill when translating a foreign subsidiary?
Calculate goodwill in foreign currency, translate at historic rate, translate at closing rate, difference added to parent's share of exchange difference on net assets of subsidiary. (Assuming proportional method). If fair value method then allocate based on NCI and P share of goodwill.
111
Which IAS deals with events after the reporting period (like adjusting events)?
IAS 10 - Events after the reporting period.
112
How could you record excess profit on sale as operating lease back if you're not just deferring it over the lease term?
Treat as loan, work out yearly cost by dividing excess by the annuity factor for the period. This is then taken to PnL as finance cost each year, the remainder of annual operating lease amount is lease rental. (The annual finance can be split into interest (excess profit x D.F) and capital payment (balancing figure).
113
Which IAS deals with employee benefits? (Pensions and things)
IAS 19 Employee benefits.
114
What is the deferred tax on pensions?
As per IAS 19 it is the difference between net defined liability less its tax base.
115
What is the IAS to do with foreign exchange rates?
IAS 21 - The effects of changes in foreign exchange rates.
116
What rates do you use for translating assets and liabilities of a foreign entity?
Year end rate.
117
What rates do you use for translating equity (share capital and reserves) of a foreign entity?
Acquisition date
118
What rates do you use for translating income and expenses of a foreign entity?
At the average rate
119
How do you deal with goodwill on consolidating with a foreign entity?
Treat it as if owned by the foreign subsidiary first, do it all in the foreign currency. Then exchange back to foreign currency at end. Do impairments after and new carrying value, you'll have an exchange gain.
120
What happens with PURP for intercompany sales?
Subtract the full amount from revenue and cost of sales, then subtract the PURP only from revenue and inventory.
121
Remember: How is inventory valued?
At the lower of cost and net realisable value.
122
What do you do with contingent assets and what are they?
Under IAS 37 a contingent asset is a possible asset that arises from past events but whose existence can only be confirmed by the outcome of future events not wholly within the entity's control. Should be disclosed but not recognised when the outcome is probable.
123
What IASs will help us determine if a forward can be accounted for as a derivative accounting?
IAS 32/ 39
124
What happens if something qualifies for hedge accounting?
Gain/ loss on hedging instrument will be taken to profit or loss in the same period as item which was hedged. If it doesn't qualify then gain / loss should go to PnL now.
125
How do you measure percentage complete of a contract if you have costs to date, surveyor valuation to date, total revenue expected and surveyor estimated future costs?
Three methods to discuss.
Costs to date / Cost to date + surveyor estimated future costs.
This is the Contract costs method. To use the certified sales method you could do Current valuation from surveyor / total revenue expected.
Cost of sale should be the costs incurred to date, even though the revenue might change. Or in the Work certified method your costs could be the certified percentage x total expected costs.
So 3 methods.
126
On sale and finance lease what happens to the profit made?
Profit on initial disposal would be deferred and amortised over the lease term.
127
What are distributable profits?
Accumulated realised profits less accumulated realised losses (generally equal to retained earnings).
128
Can you distribute dividends if you have a debit retained earnings balance in your group?
The legality of it is determined by the distributable profits in the separate financial statements rather than the consolidated ones. Also a public company may not make a distribution if it reduces the net assets below the total of the called up share capital and undistributable reserves.
129
What is the formula to determine the adjustment to retained earnings when some shares in a subsidiary are sold but it still remains a subsidiary?
The adjustment is the consideration received less the increase in NCI percentage.
130
Which IAS is about related party transactions?
IAS 24. Related parties are basically those where there is ability to exert control.
131
Where do the professional fees go relating to acquisition of a subsidiary?
Do not add them to the cost of the investment, they should be expensed to profit and loss.
132
On sale of part of a subsidiary to get an associate, how do you calculate the profit on disposal?
Proceeds + fair value of interest received + NCI at disposal - net assets at disposal - goodwill on disposal. ... my mistake was to deduct the fair value of interest retained instead.
133
What is an investment property?
Property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. Examples: land held for long-term capital appreciation land held for a currently undetermined future use building leased out under an operating lease vacant building held to be leased out under an operating lease property that is being constructed or developed for future use as investment property
134
What is IFRS 13 about?
Fair value measurement: "the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date." - To value you should maximise the use of observable inputs and minimise the use of unobservable inputs.
135
What are the three levels of valuation?
Level 1: Quoted prices in active markets for identical assets. level 2: inputs other than quoted prices for similar assets in active markets. level 3: unobservable inputs for the asset or liability.
136
When can costs on an asset be capitalised?
If it represents an improvement, increased economic benefits. IAS16
137
What happens with market based conditions (share price) and performance based conditions (revenue) in criteria for employee share based payments?
Market based ones don't matter, use the fair value at grant date, market conditions should be encoded within this. Performance conditions matter, so if different amounts of shares are to be given depending on the different revenue outcomes, take the forecasted revenue outcome and use the related number of shares to be issued for that outcome in your calculation. (If multiple years then easier to use average)
138
In defined pension benefit questions, what is a good layout?
Intro sentence, calculation, conclusion with net effect to PnL, net liability and remeasurement
139
A good layout for FS analysis?
What happened, why it happened, timings, so what, extra info needed.
140
What is audit risk?
The risk of giving the wrong opinion.
